Netflix to FCC: scary loophole in net neutrality rules

Netflix, the company that mails out DVDs and streams movies to millions of home theater potatoes, made the rounds to the Federal Communications Commission on Friday. The company's general counsel told staffers and Commissioners that the movie rental distributor supports the agency's proposed Internet nondiscrimination rules. But they also include a potentially nasty loophole, Netflix warned—the "managed services" category that the Commission created in its Notice of Proposed Rulemaking back in October.

"Netflix is concerned that network operators will use so-called managed services in a way that harms unaffiliated content or service providers that compete directly with services provided by the network operator," the company told the FCC earlier this month. "In short, if left unchecked, the 'managed services' category could engulf the Commission’s open Internet policies altogether" and let ISPs end run any regulations.

Paid provisions

What are "managed services"? That remains to be worked out. It's a vague concept that appears to include IP voice and video. The FCC's NPRM suggests they could be good or bad for competition, depending on how they're deployed.

But first some background is in order. The FCC's proposals call for two additions to the agency's four-part Internet Policy Statement, which commits the Commission to making sure consumers can access the legal content of their choice on the 'Net. Rule Five will add an enforcement provision to the FCC's regulations, requiring networks to treat content, applications, and services in nondiscriminatory ways—that is, to avoid "from favoring or disfavoring lawful content, applications, or services accessed by their subscribers." Rule Six will require ISPs to be transparent about their network management practices, disclosing their methods to the public.

One of the biggest questions is whether Rule Five would apply not just to crude attempts to block content, but to priority access arrangements, which the big cable companies and the telcos very much want. AT&T defines these arrangements as "voluntary commercial agreements for the paid provision of certain value-added broadband services"—presumably faster and smoother access for certain sites.

In its NPRM, the FCC wonders where the freedom to cut these kind of deals could go.

"A broadband Internet access service provider that is also a pay television provider could charge providers or end users more to transmit or receive video programming over the Internet in order to protect the broadband Internet access service provider’s own pay television service," the document speculates. "Alternatively, such a broadband Internet access service provider could seek to protect its pay television service by degrading the performance of video programming delivered over the Internet by third parties."

Gatekeeper

Amen to that, declares Netflix, which definitely has a dog in this fight. In addition to 11 million DVD rental subscribers, the company streams tons of video. In fact, half of its customers have watched at least 15 minutes of movie content on its main site, the service estimates. Netflix predicts that by the end of this year, its streaming capacity will be available on over 100 different devices, including TiVO, BluRay, X-Box, and PlayStation 3, plus SONY and VIZIO IP-TV sets.

"The fact that network operators control the delivery pipes and generate significant revenue from content that travels over those pipes provides both the means and motive for discriminating against new ventures that might threaten revenue sources of the network operators," Netflix warns. The filing worriedly mentions Comcast and Time Warner Cable's TV Everywhere ventures, in which cable subscribers will have access to content over the web, and the proposed merger of Comcast and NBC Universal.

These developments "exacerbate the growing concern that will use their control over programming networks to stifle competition, including the growing competition from online video providers like Netflix," Netflix adds. "The concern that network operators will use their gatekeeper control over broadband access services to discriminate against unaffiliated content in a variety of ways is central to the Commission’s proposed open Internet policies, and a wide variety of discriminatory conduct that stems from such gatekeeper control should be cognizable under the net neutrality rules."

Managing managed services

But in order for this potential problem to be "cognizable" [our translation: "covered"] under the agency's Open Internet rules, Netflix urges the Commission to clarify what are or are not "managed services"—at present a rather vague category that the FCC added to its NPRM. The document defines them as IP offerings such as voice and video, "often provided over the same networks used for broadband Internet access service, that have not been classified by the Commission."

The agency mentions AT&T's U-VERSE IP-Video package as an example of a managed service. "Should the Commission classify these services for policymaking purposes, and if so, how?" the Commission asks. "If rules are appropriate in this area, what should those rules state?"

Ask us something hard, Netflix responds. "The potential category of 'managed services' discussed in the NPRM is of concern, particularly if this category of services is exempt from the openness or nondiscrimination provisions of the rules," the company writes. The FCC must ensure that ISPs "not simply use the 'managed services' category to "end-run the openness and nondiscrimination rules."

What kind of call will the FCC make on this? Good question. Wish we had the answer, for Netflix's sake. At present all we have are the agency's open-ended questions.

"We recognize that these managed or specialized services may differ from broadband Internet access services in ways that recommend a different policy approach, and it may be inappropriate to apply the rules proposed here to managed or specialized services," the Commission's proposals note. "However, we are sensitive to any risk that the growth of managed or specialized services might supplant or otherwise negatively affect the open Internet."

Originally posted by Ostracus:Sounds like Netflix should buy themselves some "pipes".

And how will that help if Comcast suddenly starts "managing" netflix traffic to all of it's consumers?

I'm pretty sure my ISP is already doing this. Most everything else is fast, but Netflix, Youtube and Hulu perform like crap on my "20MB" connection. Downloads and speed tests are fast, but watching video on the big name sites is slow. Of course, the ISP also sells cable TV, which I do not buy.

So the solution is to disconnect the pipes from the providers? That is, force Comcast/VZ/etc. to split into infrastructure and provider companies? Give one or two companies protected local monopolies in infrastructure layout, and then let anybody who wants to provide IP/telephony/TV service compete to do so? I'd get behind that.

Originally posted by Ostracus:Sounds like Netflix should buy themselves some "pipes".

And how will that help if Comcast suddenly starts "managing" netflix traffic to all of it's consumers?

How indeed? But I'm making note of the trend for content creators to merge with content carriers. e.g. Comcast/NBC merger or the TW in TWC. I'm sure that Netflix owned pipes wouldn't have some of the issues addressed in the article.

Originally posted by Ostracus:Sounds like Netflix should buy themselves some "pipes".

And how will that help if Comcast suddenly starts "managing" netflix traffic to all of it's consumers?

How indeed? But I'm making note of the trend for content creators to merge with content carriers. e.g. Comcast/NBC merger or the TW in TWC. I'm sure that Netflix owned pipes wouldn't have some of the issues addressed in the article.

Fair enough. But then you have the other side, why would netflix own it's pipes if it can't manage it for it's own service. Seems like a big investment for relitivly little return

Originally posted by Ostracus:Sounds like Netflix should buy themselves some "pipes".

And how will that help if Comcast suddenly starts "managing" netflix traffic to all of it's consumers?

I'm pretty sure my ISP is already doing this. Most everything else is fast, but Netflix, Youtube and Hulu perform like crap on my "20MB" connection. Downloads and speed tests are fast, but watching video on the big name sites is slow. Of course, the ISP also sells cable TV, which I do not buy.

This sounds like what happens with Comcast because of how Powerboost works...there's an increased burst of speed for just the first 10MB of a download (and 5MB of upload), after which the speed falls back down. This throws off any speed test and doesn't give you your actual sustained download/upload rates on most speed tests.

Originally posted by nbs2:So the solution is to disconnect the pipes from the providers? That is, force Comcast/VZ/etc. to split into infrastructure and provider companies? Give one or two companies protected local monopolies in infrastructure layout, and then let anybody who wants to provide IP/telephony/TV service compete to do so? I'd get behind that.

I have said that very thing for years. I would not stop at the ISPs though. I would expand the process to all areas of data delivery, such as CableTV, InetTV, SataliteTV, Satalite Radio, Inet Radio, Regular Phone, Cell Phone, Inet Phone, Regular TV/Radio/Phone, etc. It's all just the transfering of data, so why not put them all under the same set of rules. And don't give them long contracts with monopolies. Make sure they are on short contracts so they are more inclined to keep their equipment up to date, and make sure there are at least 2, prefferably 3, companies providing services in each area.

Also, what ever they charge for access to their lines for company a is the same rate they are required to charge companies b-z. This makes sure the smaller companies can compete with the larger ones and keep them a little more honest.

I like the way you two are thinking but the "protected monopolies" has got to go.

That's what got us into this mess to begin with.

Make the pipes truly "dumb" and solely owned by the individual municipalities, like utilities in most areas.

Otherwise, I like everything else.

I like this. It allows the community to determine what delivery methods are most important to them, based on resident desires and community layouts.

On the flip side, if a company offers connectivity via a method that the community doesn't currently have set up, the company can set a deal to offset build-out costs ("go halfsies", or some such) with a relatively minor exclusivity deal for the company that does this ... say, one year exclusive use of the new set up, which is non-renewable.

As for what counts as a "managed service," make any entity that wants something to fall under that first go to the FCC and get clearance specifically saying "Yes, your service xyz falls under this." No more having to define what these things are before they exist or before technology changes everything (again). This would be revocable if abused or if the FCC's policies change. And they have to get re-cleared if they make changes to the service. No, the ISPs wouldn't like this, but that's the point. Any rules they like would screw the customer and everyone else.

Infrastructure issues will need to be fixed before anyone gets to rely on streamed media. All the whining about 'bandwidth hogs' is because there's not enough pipe to supply all the drinkers. There won't BE more pipe until more people are conned into thinking they'll get to do what they want for the money they're paying. That amount of money is going into profit rather than the infrastructure, so the upgrades to REALLY let people do what they want along with fully supporting lots of new customers aren't coming.

This is where a 'pipe' company with lower profit aspirations would be helpful. Not so little profit that investors don't want to play, but enough so the pipes are fat and full and nobody has a good reason to complain.

What we're stuck with now are accountants demanding that profits go UP while expendatures go DOWN and nobody gets what they want unless they want to waste money. The old rules about customers being the reason a company exists not longer apply: instead, it's the money that matters and the customers are just a whine that the money-exchange requires that companies put up with...

Originally posted by VideoGameTech:No, the ISPs wouldn't like this, but that's the point. Any rules they like would screw the customer and everyone else.

THIS!!!

No rules, regulations, or laws should be passed that the ISP's like or "get behind". If they like it, you shouldn't. If they don't, you should vote all over that piece!

Sounds sarcastic but it isn't. I'm totally serious. If we don't start voting against the ISP's we are dead meat as consumers. And before the pro-ISP crowd starts in, this will do nothing to anyone's job at the ISP. All it will do is force them to compete, which right now they are not.

Originally posted by Ostracus:Sounds like Netflix should buy themselves some "pipes".

And how will that help if Comcast suddenly starts "managing" netflix traffic to all of it's consumers?

Well obviously Netflix should wire a direct individual link to every single customer.

I'm not sure if you're being tongue-in-cheek or serious, but nonetheless, what you're saying is exactly what Comcast would say. So this is really directed at the large ISP's who are trying to foist this garbage model onto the public.

Sure, that model works. Except that any new startup in this space basically would also become an ISP and build out tons of infrastructure before ever getting their model to market, which is not a way to boost innovation is it. Wonderful suggestion you have there.

One solution is for the government to stop allowing unabated vertical integration. If Comcast wants to be a content company and own NBC, fine. But then make them spin off their ISP/cable holdings. But I'm not holding my breath waiting for this to happen because, you know, money is all that matters to lawmakers in these times, and we are all "consumers" which is just another way of saying "shut up and accept it."

Originally posted by VideoGameTech:No, the ISPs wouldn't like this, but that's the point. Any rules they like would screw the customer and everyone else.

THIS!!!

No rules, regulations, or laws should be passed that the ISP's like or "get behind". If they like it, you shouldn't. If they don't, you should vote all over that piece!

Sounds sarcastic but it isn't. I'm totally serious. If we don't start voting against the ISP's we are dead meat as consumers. And before the pro-ISP crowd starts in, this will do nothing to anyone's job at the ISP. All it will do is force them to compete, which right now they are not.

I think that the "managed services" should only include real-time, live communication (VOIP, Video chat, Live Streaming Broadcasts, etc.) but not including anything that is selectively queued then streamed at arbitrary times (netflix, hulu, etc)

Originally posted by Ostracus:Sounds like Netflix should buy themselves some "pipes".

And how will that help if Comcast suddenly starts "managing" netflix traffic to all of it's consumers?

Well obviously Netflix should wire a direct individual link to every single customer.

I'm not sure if you're being tongue-in-cheek or serious

I was totally being tongue-in-cheek. If ISPs get their way, every web site would need to be it's own ISP with independent connections to customers. I mean, take what they're saying to the furthest extent and it's a Microsoft wire coming into your house, an Apple one, Google, Netflix, etc. All individual wires because the local ISP wanted too much (and in the end, would get nothing... talk about killing the goose that laid the golden egg).

The sheer temerity of ISPs in this country is mind boggling. They sell a incredibly profitable product with basically zero marginal cost and yet seem incapable of just enjoying their obscene profit margins. No infrastructure upgrades, throttling and now this? Make your pipes sufficiently wide and you won't need to screw over the content companies that make your service useful in the first place.

On the flip side, if a company offers connectivity via a method that the community doesn't currently have set up, the company can set a deal to offset build-out costs ("go halfsies", or some such) with a relatively minor exclusivity deal for the company that does this ... say, one year exclusive use of the new set up, which is non-renewable.

And/or the company gets tax incentives for helping to improve/modernize the infrastructure.

On the flip side, if a company offers connectivity via a method that the community doesn't currently have set up, the company can set a deal to offset build-out costs ("go halfsies", or some such) with a relatively minor exclusivity deal for the company that does this ... say, one year exclusive use of the new set up, which is non-renewable.

And/or the company gets tax incentives for helping to improve/modernize the infrastructure.

Places considering tax incentives should probably consider making them contingent upon, and starting after, completion of the infrastructure project, if you're going to go that way. Doing it the other way around didn't work too well for the US.

Make the pipes truly "dumb" and solely owned by the individual municipalities, like utilities in most areas.

I like this. It allows the community to determine what delivery methods are most important to them, based on resident desires and community layouts.

That's not "dumb," that's "managed." I mean, what happens if what "the community" wants delivered and what you want delivered diverge?

The idea of a "dumb" pipe means a non-managed pipe, which means all kinds of weird and bad crap can happen to what everybody wants delivered when demand peaks. By definition, the diameter of any pipe is not infinite--so regardless of the entity managing the pipe--not managing the network flow is what would be truly dumb.

Make the pipes truly "dumb" and solely owned by the individual municipalities, like utilities in most areas.

I like this. It allows the community to determine what delivery methods are most important to them, based on resident desires and community layouts.

That's not "dumb," that's "managed." I mean, what happens if what "the community" wants delivered and what you want delivered diverge?

The idea of a "dumb" pipe means a non-managed pipe, which means all kinds of weird and bad crap can happen to what everybody wants delivered when demand peaks. By definition, the diameter of any pipe is not infinite--so regardless of the entity managing the pipe--not managing the network flow is what would be truly dumb.

You're playing a bit of semantics, I feel, WaltC.

Of course there would have to be some "management" of the pipes. What we're generally talking about when we're referring to "dumb" pipes in this context is not providing priority for certain packets or data shaping.

Originally posted by ZobarStyl:The sheer temerity of ISPs in this country is mind boggling. They sell a incredibly profitable product with basically zero marginal cost and yet seem incapable of just enjoying their obscene profit margins. No infrastructure upgrades, throttling and now this? Make your pipes sufficiently wide and you won't need to screw over the content companies that make your service useful in the first place.

Big business is based on rising stock prices, not profits. It's don't matter how much money there making if there profits aren't going up.

I think the FCC had a very specific idea in mind when they referred to "Managed Services". For example, Verizon customers with fiber to the home have access to three distinct services: POTS, TV, Internet. Certainly, customers can choose not to pay for POTS or TV and run VOIP, Hulu, etc. through their Internet connection. The FCC did not want to get involved, through this regulation, in sorting out what Verizon can do on its POTS and TV services. Certainly, Verizon has the right to only offer 10Mbps over Internet and stutter-free 1080p video over TV. However, under net neutrality rules, Verizon would have to slow down their entire Internet stream, not just Internet video content and not just Internet video content from sites that didn't pay them for special handling. There is strong competitive pressure for Verizon, as an ISP, to continue boosting Internet bandwidth. So this presently works out fine.

Now we get to the loop hole. Suppose Verizon announces a new Roku Managed Service. They sell you a subscription to content available through your Roku box. Right now that includes Netflix, Amazon, and MLB video, Pandora audio, and some other low-bandwidth stuff like Facebook pictures. All this stuff receives excellent QoS so that it is as reliable as their TV and POTS service. They keep adding content to the Roku service until they can capture enough customers away from Internet and then they slow investments in Internet bandwidth.

This is the AOL model. I think it is doomed to fail because Verizon can't predict who will be the next YouTube or Facebook and sign them up fast enough. You will always want to go to the Internet to get the latest and greatest. But it could be a very profitable model and, if its mildly successful, would hamper the ability of content-only companies like Netflix to compete.

Make the pipes truly "dumb" and solely owned by the individual municipalities, like utilities in most areas.

I like this. It allows the community to determine what delivery methods are most important to them, based on resident desires and community layouts.

That's not "dumb," that's "managed." I mean, what happens if what "the community" wants delivered and what you want delivered diverge?

The idea of a "dumb" pipe means a non-managed pipe, which means all kinds of weird and bad crap can happen to what everybody wants delivered when demand peaks. By definition, the diameter of any pipe is not infinite--so regardless of the entity managing the pipe--not managing the network flow is what would be truly dumb.

Originally posted by KissMyBigFatArs:I think the FCC had a very specific idea in mind when they referred to "Managed Services". For example, Verizon customers with fiber to the home have access to three distinct services: POTS, TV, Internet. Certainly, customers can choose not to pay for POTS or TV and run VOIP, Hulu, etc. through their Internet connection. The FCC did not want to get involved, through this regulation, in sorting out what Verizon can do on its POTS and TV services. Certainly, Verizon has the right to only offer 10Mbps over Internet and stutter-free 1080p video over TV. However, under net neutrality rules, Verizon would have to slow down their entire Internet stream, not just Internet video content and not just Internet video content from sites that didn't pay them for special handling. There is strong competitive pressure for Verizon, as an ISP, to continue boosting Internet bandwidth. So this presently works out fine.

Now we get to the loop hole. Suppose Verizon announces a new Roku Managed Service. They sell you a subscription to content available through your Roku box. Right now that includes Netflix, Amazon, and MLB video, Pandora audio, and some other low-bandwidth stuff like Facebook pictures. All this stuff receives excellent QoS so that it is as reliable as their TV and POTS service. They keep adding content to the Roku service until they can capture enough customers away from Internet and then they slow investments in Internet bandwidth.

This is the AOL model. I think it is doomed to fail because Verizon can't predict who will be the next YouTube or Facebook and sign them up fast enough. You will always want to go to the Internet to get the latest and greatest. But it could be a very profitable model and, if its mildly successful, would hamper the ability of content-only companies like Netflix to compete.

POTS and TV services originate from within Verizon's network - they are unrelated to the Internet. You may be entirely correct on the reasoning for the "managed services" exceptions, but that would be ignorant reasoning.

lul wut?The whole point of net neutrality is to not limit or manage the data that's on the "internet" connection, you set the speed in the service plan and the rest is up to general internet congestion and what's going on at the 2 different ends.

Now yes data flow will be managed but its done so to alleviate congestion IE throttling people who are maxing out their speed for long periods of time, moving data traffic off over loaded servers to less loaded servers,ect,ect that's about all they should be able to do.

Originally posted by ReaderBot:POTS and TV services originate from within Verizon's network - they are unrelated to the Internet.

I don't follow. How is watching a "purchased copy" of 30ROCK from Amazon-on-Demand through my Roku box over the "Internet" fundamentally different from watching it "On-Demand" from Verizon's "TV" service? Not to mention streaming live broadcasts.

Matthew Lasar / Matt writes for Ars Technica about media/technology history, intellectual property, the FCC, or the Internet in general. He teaches United States history and politics at the University of California at Santa Cruz.